Severability-Based Partial Setting Aside of an Arbitral Award in a Section 37 Appeal: “Financial Model” Alone Cannot Sustain Loss-of-Profits Damages

1) Introduction

The batch comprised two appeals under Section 37 of the Arbitration and Conciliation Act, 1996, arising out of a concession agreement for development of the Meerut–Karnal Road Section (SH-82) on a DBFOT (design, build, finance, operate and transfer) PPP model. The appellant in ARPL No.41 of 2025 was U.P. State Highways Authority (UPSHA), and the appellant in ARPL No.70 of 2023 was the concessionaire (M/s Abhijeet Meerut Karnal Toll Road Limited).

The core project dispute was triggered because the appointed date was never fixed: UPSHA allegedly failed to satisfy its conditions precedent, especially providing 90% right of way, preventing commencement of construction. The concessionaire terminated the agreement (13.01.2014), arbitration ensued, and UPSHA encashed the performance bank guarantee (Rs.29.16 crores). The Arbitral Tribunal issued a split award (06.05.2017). Section 34 challenges by both sides were dismissed by the Commercial Court (31.05.2023), leading to the present Section 37 appeals.

The High Court’s key contribution lies in (i) its treatment of a loss-of-profits award that rested largely on a “financial model” and arbitral assumptions, (ii) its insistence that Section 37 review remains narrow but can intervene where the award is effectively “no evidence”/ipse dixit, and (iii) its application of severability to set aside only the offending portion (Claim No.4) and remit it for fresh determination while preserving the remainder of the award.

2) Summary of the Judgment

  • UPSHA’s appeal (ARPL No.41 of 2025) partly allowed: the Court set aside the award only to the extent of Claim No.4 (loss of profits/loss of opportunity), holding that the majority award on Claim No.4 suffered from ipse dixit and was a case of no worthy evidence.
  • The Court applied severability (as explained in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1) and modified the award by severing Claim No.4; it remitted Claim No.4 for fresh determination by a tribunal constituted as per law.
  • UPSHA’s other challenges failed: the Court rejected allegations of procedural irregularity (no demonstrated prejudice), upheld the finding of wrongful encashment of performance bank guarantee (Claim No.3), upheld the EPC-related award (Claim No.5), and upheld rejection of UPSHA’s Counter Claim No.5.
  • Concessionaire’s appeal (ARPL No.70 of 2023) dismissed: rejection of Claim No.1 (damages for failure of conditions precedent) and Claim No.6 (termination payments) was upheld, inter alia to avoid duplication of recovery and because termination payment clauses were tied to the “operation period”, which never commenced.

3) Analysis

3.1 Precedents Cited (and how they shaped the decision)

A. The “narrow gate” of Section 34/Section 37 interference

The Court built its standard of review primarily through its own prior synthesis and Supreme Court authorities:

  • UCM Coal Co. Ltd. v. Adani Enterprises Ltd. : 2025 SCC OnLine All 7608: the High Court reproduced its earlier encapsulation of Section 37 limits, functioning as the immediate framework for the present appeal.
  • Mmtc Limited v. Vedanta Limited .: relied upon for the proposition that Section 37 cannot travel beyond Section 34, courts do not reappreciate evidence, and must be slow to disturb concurrent findings.
  • Uhl Power Company Ltd. v. State Of Himachal Pradesh ., K. Sugumar v. Hindustan Petroleum Corpn. Ltd., Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd., South East Asia Marine Engg. & Constructions Ltd. (Seamec Ltd.) v. Oil India Ltd.: collectively used (via quotation/synthesis) to reinforce that arbitral interpretation and fact-finding are largely final if “plausible,” and courts cannot act as appellate fact-finders.
  • Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd.: cited to explain the philosophical balance between party autonomy/finality and due process/fairness; it supports intervention only for serious infirmities (perversity, patent illegality, breach of natural justice).
  • AC Chokshi Share Broker (P) Ltd. v. Jatin Pratap Desai and Jan De Nul Dredging India (P) Ltd. v. Tuticorin Port Trust : (2026) 3 SCC 186: used to reiterate that Section 37 power is even more restricted than Section 34; appellate review is confined to whether the Section 34 court acted within bounds and whether the award violates substantive law/Act/contract terms.
  • Ramesh Kumar Jain v. Bharat Aluminum Company Ltd : 2025 SCC OnLine SC 2857 (read with Ssangyong Engineering Constructions Company Ltd. v. NHAI : (2019) 15 SCC 131): used to explain “public policy” post-amendment and to locate “patent illegality” within a constricted space; importantly, it supports intervention for “no evidence”/perversity without permitting merits review.

These precedents did not merely form background. They functioned as the Court’s justification for: (i) rejecting most challenges that essentially sought reappreciation, and (ii) still permitting intervention where the loss-of-profits reasoning crossed into “ipse dixit/no evidence”.

B. Loss of profits: evidentiary threshold and “no evidence” perversity

  • UNIBROS v. ALL INDIA RADIO : 2023 SCC OnLine SC 1366: this was the decisive precedent for Claim No.4. The High Court extracted the principle that loss of profit cannot be granted on guesswork and that formulae/estimates do not substitute proof. It used Unibros to test whether the concessionaire produced credible evidence beyond projections, and to characterise the majority award as effectively unsupported.

C. Severability and modification rather than total setting aside

  • Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1: the Court treated this as enabling limited “modification” by severing the invalid portion of an award in defined circumstances. It relied on the decision to justify: (i) preserving the valid part of the award; (ii) setting aside only Claim No.4; and (iii) remitting Claim No.4 for fresh adjudication.

D. Evidentiary value of a third-party award/settlement instrument

  • UCM Coal Co. Ltd. v. Adani Enterprises Ltd. : 2025 SCC OnLine All 7608: the Court cited its own discussion recognising that an arbitral award placed on record in another proceeding can be a significant piece of evidence, supporting its approach to the concessionaire’s reliance on conciliation awards to prove EPC payments (Claim No.5).

E. Other cited authorities (less determinative in the final holding)

  • Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies Pvt. Ltd. : (2021) 7 SCC 657: cited by UPSHA to stress relevance of dissenting opinions; the High Court, however, did not treat the dissent as a basis to re-weigh merits generally, but it did find the majority’s Claim No.4 reasoning infirm on its own terms.
  • First Post, REP v. R. Vijayambal and Others : 2022 SCC OnLine Madras 134: relied upon by UPSHA, but the High Court’s outcome turned on its own analysis and Supreme Court standards rather than this authority.
  • In the arbitral majority’s reasoning (not the High Court’s), references were made to: GambhirmallMahabirprasadvs The Indian Bank and another, SanyubtNirmalaVs Delhi Development Auhority, and V.D. Tulzapurkar& V Khalid B. for broad propositions about awarding benefits/percentages. The High Court implicitly distanced itself from that “percentage/guesswork” approach by applying UNIBROS v. ALL INDIA RADIO : 2023 SCC OnLine SC 1366.

3.2 Legal Reasoning

A. Procedural irregularity: late documents and the “prejudice” requirement

UPSHA’s primary procedural attack was that the concessionaire introduced three new documents along with written submissions after oral arguments, and the tribunal took them on record without first deciding admissibility/relevance, allegedly violating Section 18 (equal treatment) and natural justice.

The Court reasoned that arbitral procedure is flexible (tribunal not bound by CPC/Evidence Act; see Section 19), and a “clarificatory hearing” was held. Crucially, it held that even if there was a procedural infraction in not expressly deciding admissibility/relevance later, UPSHA failed to demonstrate how it suffered prejudice or any consequent failure of justice. UPSHA neither showed what rebuttal evidence it sought to file nor any denial of opportunity after the order taking documents on record (05.01.2017). Hence, the award was not vitiated on this ground.

B. Performance bank guarantee (Claim No.3): linkage to “appointed date” and commencement of obligations

Upholding the tribunal’s unanimous finding, the Court emphasised the contractual structure: the performance security secured the concessionaire’s obligations tied to project execution, but the appointed date was never fixed because UPSHA did not procure 90% right of way (a condition precedent under Article 4.1.2(a) read with Article 10.3.1). Where construction never commenced for want of UPSHA’s foundational compliance, the Court held it was not a case of concessionaire default justifying invocation of performance security. Hence, encashment was wrongful.

C. Loss of profits (Claim No.4): “financial model” and arbitral assumptions are not proof

This is the judgment’s doctrinal centre. The Court found that the majority award effectively merged “wrongful encashment/locked-in funds” with “loss of profit,” and then awarded Rs.157.57 crores by scaling down projections through assumptions (e.g., reducing horizon to five years, adjusting IRR/interest rates), without a clear evidentiary basis. The “financial model” was treated as the bedrock; but the Court held that a financial model (being projection-based and assumption-laden) can at best be corroborative and cannot, by itself, quantify loss-of-profit damages.

Applying UNIBROS v. ALL INDIA RADIO : 2023 SCC OnLine SC 1366, the Court concluded that the award on Claim No.4 was ipse dixit and amounted to a case of no evidence. It therefore set aside the finding on Claim No.4. Importantly, the Court treated this as falling within the narrow but real corrective jurisdiction available under Section 34/37 for perversity/patent illegality.

D. EPC contractor payments (Claim No.5): reconciling Issue No.6 with compensable project expenditure

UPSHA argued internal contradiction: Issue No.6 held the concessionaire could not enter EPC contracts before signing the concession agreement, yet Claim No.5 was allowed. The Court upheld Claim No.5, holding that (i) EPC contractors were in fact deployed (supported by a third-party engineer report), (ii) the letter of award had already been issued (17.11.2011) and accepted (18.11.2011), (iii) conciliation awards evidenced the concessionaire’s liability to EPC contractors, and (iv) such payments were project-linked costs attributable to the project’s premature failure due to UPSHA’s inability to provide right of way. The Court also drew support from its treatment of arbitral awards as relevant evidentiary material in UCM Coal Co. Ltd. v. Adani Enterprises Ltd. : 2025 SCC OnLine All 7608.

E. UPSHA Counter Claim No.5: authority’s own condition-precedent costs not recoverable as “compensation” for concessionaire breach

UPSHA sought reimbursement of land acquisition/forest clearance/utility shifting/consultancy expenses under Article 35.1. The Court affirmed rejection: these expenses were part of UPSHA’s own obligation to procure the site and satisfy conditions precedent; acquisition did not progress beyond Section 4 notification (no Section 6 notification), and UPSHA’s own failure to make right of way available undercut the theory that the concessionaire’s breach caused these losses.

F. Severability and remand: preserving the rest of the award

After setting aside Claim No.4, the Court addressed whether the entire award must fall. Relying on Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1, it applied the doctrine of severability: Claim No.4 was severable from the remaining award. The Court therefore modified the award to the limited extent of excising Claim No.4 and remitted Claim No.4 for fresh determination by a tribunal constituted as per law, leaving all other parts intact.

3.3 Impact

  • Stricter scrutiny of “projection-only” loss-of-profit awards in PPP disputes: tribunals may rely on financial models, but courts may treat a “model-only + assumption-based scaling” approach as “no evidence/ipse dixit” when not supported by contemporaneous, project-specific proof of loss as required by UNIBROS v. ALL INDIA RADIO : 2023 SCC OnLine SC 1366.
  • Operationalisation of severability post-Gayatri Balasamy: the decision shows a practical pathway for courts to avoid the all-or-nothing outcome: defective components (here, Claim No.4) can be severed, remitted, and re-determined without unsettling the entire award.
  • Procedural challenges must demonstrate prejudice: alleging “late documents” or procedural imperfections will likely fail unless the challenger concretely demonstrates denial of opportunity and consequent failure of justice.
  • Performance security invocation in concession projects: the reasoning reinforces that performance securities tied to construction obligations are difficult to invoke where the authority’s conditions precedent (especially right of way) prevent commencement and the appointed date is never fixed.

4) Complex Concepts Simplified

  • Section 37 appeal (why it is “narrow”): a Section 37 court does not decide the dispute afresh. It checks whether the Section 34 court stayed within the limited grounds for setting aside an award (public policy, patent illegality, natural justice violations, etc.).
  • Conditions precedent: pre-start obligations that must be completed before the project can formally begin (e.g., authority providing right of way, concessionaire providing performance security/financial closure). If they are not met, the “appointed date” may not be fixed.
  • Appointed date: the contractual “start gun.” Many timelines (like completion in 730 days) are counted from this date. If it never arrives, construction obligations may not legally kick in.
  • Performance bank guarantee: a security instrument that can be invoked on defined defaults. But if the project never reached the stage where the secured obligations could arise (because the authority failed to provide the site), invocation may be wrongful.
  • Patent illegality / “no evidence”: courts generally avoid reappreciating evidence. But if an award is based on no credible evidence (or on pure assumptions without proof), it can be set aside as perverse/patently illegal.
  • Severability of awards: if only one part of an award is legally defective and that part can be separated without breaking the rest, courts can preserve the valid portion and set aside/remit only the invalid part.

5) Conclusion

The Allahabad High Court’s decision balances deference to arbitral finality with targeted correction. It reaffirmed that Section 37 is not an appellate rehearing, rejected procedural objections for lack of demonstrated prejudice, and upheld key contractual findings on performance security and EPC-linked expenditure. Yet it intervened decisively where the loss-of-profits award (Claim No.4) rested largely on a financial model and arbitral assumptions, characterising it as ipse dixit/no evidence under the discipline of UNIBROS v. ALL INDIA RADIO : 2023 SCC OnLine SC 1366. Critically, it then applied Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1 to sever and remit only Claim No.4, preserving the remainder of the award. The judgment thus stands as a significant post-2025 example of partial setting aside by severability coupled with a heightened evidentiary threshold for projected loss-of-profit claims in infrastructure concessions.